Industry players blame low margins and tough rules for turning the once-lucrative mutual funds business into sour grapes, wherein existing players are contemplating selling out and applicants no more being keen on securing approvals
Nearly two dozen firms awaiting the Securities and Exchange Board of India (SEBI) nod for setting up mutual funds (MFs) now seem to have had a change of mind and they are dilly-dallying on the matter, reports PTI.
Many of these applicants had to furnish more information but they are delaying getting back.
Industry players blame low margins and tough rules for turning the once-lucrative mutual funds business into sour grapes, wherein existing players are contemplating selling out and applicants no more being keen on securing approvals.
There are about three dozen fund houses operating in the country, but business has come under pressure in recent months, with June alone seeing a 16% dip in total assets under management (AUM).
Besides, there are about a dozen more entities registered with SEBI.
On the top of it, as many as 24 applications are pending with SEBI for entering this business, but the processing status data available with the market watchdog indicates a lack of interest from most of those who had earlier announced mega plans to enter the business.
Out of these applications, 18 have been asked to furnish further information and such pending applications date way back to 2006.
"The corporate houses are shying away from entering the asset management business as they are finding them less attractive with the SEBI now turning its focus to making it investor friendly," a senior industry official said.
Those awaiting SEBI nod include Matrix Financial Services (since March 2006), Indiabulls (June 2007), Nikko AM (July 2007), India Infoline (January 2008), SREI Infra Finance (July 2006), Union Bank of India-KBC Asset Management (February 2009).
Entities seeking approval from SEBI also include Jaypee Capital Services, ASK Investment Holdings, Prime Securities, Karvy Stock Broking, Unicon Securities, Mahindra & Mahindra Financial Services, First Global Stockbroking, Bajaj FinServ-Allianz Global Investors, Enam Asset Management and Parag Parikh Financial Services.
Besides, HDIL Constructions and Kumar Housing are seeking nod to set up real estate MFs for about a year now.
Out of these applications, only one (Parag Parikh Financial Services) was filed this year and the remaining were submitted with SEBI between 2006 and 2009.
Sources in the industry said that many potential entrants are putting their entry plans on the back burner and even some existing players are developing cold feet, presumably because of falling margins and tough regulations.
Compounding their woes is the fact that those looking to exit are unable to find buyers at the price sought by them.
"Overall the MF industry is in a dilemma after SEBI turned its attention to the MF industry to make it more transparent. Distributors are now preferring to sell insurance products," SMC Capitals equity head Jagannadham Thunuguntla told PTI.
"The margins of existing players are getting squeezed. Although there are a lot of players on the block, but there are few takers for them," he said.
Among the existing players, at least half a dozen are exploring ways to partly or fully selling their stakes, a senior official at a leading fund house said.
The mutual fund industry lost 16% from its average assets in June, taking the total to near Rs ,75,000 crore, as per the data available with the industry body Association of Mutual Funds in India (AMFI).
On the regulatory front, SEBI has been working hard to make the business investor-friendly, but some of its steps, such as abolishing the entry load and crackdown on agents' commission, are being blamed for having actually worked against the industry.
Sales of equity schemes of MFs have been hit worse, after SEBI banned mutual funds from charging investors to pay fees to distributors.
Last month SEBI chairman CB Bhave said that the MFs needed to look at how investors benefit from investing in their products, rather than create an incentive structure that suits them.
Although the industry players agree to weaknesses in the way they function, they are also blaming regulatory actions.
At a recent summit, AMFI chief H N Sinor said that the industry has lost its growth momentum after recent regulatory changes and the polices needed to be reworked.
The growth has been attributed to good showing by manufacturing, particularly capital and consumer goods
Industrial output, as measured by the Index of Industrial Production (IIP), rose by 11.5% in May — growing in double digits for the eighth straight month — on good showing by manufacturing, particularly capital and consumer goods. In comparison, industry grew by 2.1% in May last year, reports PTI.
The manufacturing segment, which constitutes around 80% of the IIP, grew 12.3% in May against 1.8% in same month last year, according to the official data released today.
Within manufacturing, capital goods production rose by 34.3% in May against a negative growth rate of 3.6% a year ago.
Consumer durables output rose by 23.7% during the month under review against 13.2% in the same period last year.
The other two sectors, mining and electricity, expanded by 8.7% and 6.4% in May, respectively against a growth rate of 3.4% and 3% in the same period last year.
According to the data, of the 17 industries, as many as 15 showed positive growth in May.
The industrial output for April was revised downwards to 16.52% from provisional figures of 17.6% earlier.
Money managers are supposed to be experts in managing money. But their performance in the US have been very average
Money managers either of hedge funds, mutual funds pension funds or sovereign wealth funds are some of the best-compensated individuals on earth. They are supposed to use their expert knowledge of markets, finance and economics to deliver outstanding returns to their clients, but do they? Are they worth the faith put in them by hard working people whose pensions they manage or the citizens whose funds they invest? Do they add value or additional returns over a random selection or investments? In short, are they worth the money? The sad truth is probably not.
Let us start with the stars of money managers: hedge funds and private equity. These financial geniuses and deal makers are paid literally billions to invest other people's money, but do they actually make money?
Hedge funds, when they were new, did make a lot of money. According to Chicago-based data provider Hedge Fund Research between 1990 and 2000 hedge funds were able to achieve an astonishing annual return of 18.74%. They did this by exploiting opportunities in markets. Of course the great thing about competitive markets is that success breeds competition subsequently driving down prices. Over the more recent past, between 2000 and 2007, hedge fund returns have been far more modest, just an 8.61%.
Normally an 8.61% return would be considered ample, but not with hedge funds. These celebrity hedge fund managers command large fees. The old standard in the industry, 2 and 20, (2 % of assets, and 20% of profits) required hefty returns just to break even. A return of 8.61% would be reduced by 3.7% in fees. So the real return would be less than 5%, a return that is often available on investments with little or no risk.
But there can be more fees. Hedge fund managers' methods and strategies are often arcane and filled with all the mystery that the name 'black box' implies. How can investors choose between them? Enter the Fund of Funds (FOFs). To be safe we are supposed to diversify our hedge fund bets in many different funds chosen by another group of highly paid money managers.
And what do investors get for these extra charges? Not much. This year regular hedge funds are down about 2%, and that does not include the 2% management fee! FOFs did even worse. They are off more than 6%! It is not surprising that the FOFs' share of hedge funds assets under management has fallen from 43% to 34%. Worse, one of the justifications for fund of funds is that they have access to the best hedge funds. This might be a selling point except that one of the exclusive hedge funds that these managers chose was run by Bernard Madoff. The issue of Madoff is important for another reason, transparency. According to a study by New York University's Stern School of Business one in five hedge fund managers misrepresents their fund or its performance to investors.
What about private equity? What do investors get for the risk of tying up their money for possibly years and the extra fees? Very little. According to a recently published survey only half of the investors in private equity deals are seeing returns above 10%. Two years ago only a fifth has such small returns. The number of successful investors with returns greater than 15% has fallen from 40% to 20%. But perhaps the biggest indictment of private equity has to do with the firm Kohlberg Kravis Roberts (KKR).
KKR is the legendary private equity firm. The subject of both books and even a film, it has been around since 1976. The firm is now going public. According to filings in 2007, the firm estimated its worth to be over $25 billion. It is now estimated to be worth only $6.4 billion a decline of 76%. The shares of the founders Henry Kravis and George Roberts have declined from $6 billion each to $800 million.
It is understandable that risky hedge funds and private equities might variable returns, but what about the plain old run of the mill mutual funds. Surely these are conservatively managed with consistent returns? Well no. In the past two decades actively managed mutual funds in the aggregate have failed to beat the indexes. So investing in index funds like an Exchange Traded Funds (ETFs) has proved to be more profitable than investing in a fund managed by an experienced, intelligent individual. Over the past 30 years fund managers have been underexposed in bull markets and overexposed in bear markets. Basically, they always end up chasing the markets and following the herd.
One would think that a human might be able to beat the averages, but that is really the problem. Managers don't beat the averages, because they are human. They fall prey to instincts and cognitive biases. In fact one of the most successful managers essentially did nothing at all. For the past 20 years he parked 80% of his money in money market funds. In other words, cash.