“Investors are becoming ever more demanding. The question of how to achieve further growth in both mature and emerging markets is a daunting one. Asset managers will need to forge strategies to build on the successes we have seen,” says Kai Kramer, a BCG partner
Asset managers had a better year in 2010 than in 2009, confirming the rebound from the global financial crisis. But building on the recovery and achieving growth trajectory will remain a challenge, according to the report- Building on Success: Global Asset Management 2011-released by the Boston Consulting Group (BCG).
According to the report, the global value of professionally managed assets rose by 8% to $56.4 trillion in 2010. The increase-which followed a gain of 13% in 2009 and a decline of 17% in 2008-was driven by the recovery of equity markets, with net new inflows remaining marginally positive.
There was wide regional variation in AuM expansion in 2010, the report says. Latin America, with an increase of 18%, posted the strongest growth. In North America, AuM rose by 8%. AuM in Europe rose by 7. Japan and Australia posted a combined AuM increase of 2% (1% and 4%, respectively), while AuM rose by 11% in the rest of Asia. Kai Kramer, a BCG partner, says, "Investors are becoming ever more demanding. The question of how to achieve further growth in both mature and emerging markets is a daunting one. Asset managers will need to forge strategies to build on the successes we have seen."
The post-crisis evolution of the global asset-management market is reflected by the following trends: Investor demands keep toughening. Although markets have improved, the pressure from investors-both institutional and retail-for performance and transparency has not let up. Product dynamics continue to shift. Many product shifts observed before the crisis began have continued through 2009 and 2010 and into 2011. One key ongoing trend is the faster growth of passively managed and alternative products, compared with actively managed products.
The role of regulation is increasing. Governments and regulatory bodies have pledged to keep a sterner eye on banks, insurers, asset managers, and other providers of financial services. Financial regulation aimed at asset management clients-which forces asset managers to adjust and upgrade their services, often raising costs-may have a bigger impact on the industry than regulation aimed at asset managers.
Mature markets such as North America, Europe, Australia and Japan-where penetration of some asset-management products is stagnating-will likely grow at a modest pace overall. Developing markets such as Latin America and many parts of Asia will likely grow at a faster pace.
To pursue growth in home markets, asset managers need to take concrete steps. These include developing crystal-clear value propositions; focusing more on the end customer, and streamlining the product portfolio. To pursue growth across borders, asset managers must develop a clear view about which markets they would like to enter given their current capabilities and resources. Finally, they must decide where they do not want to be in terms of regions, products and client segments.
FMCG stocks have recorded a huge rally not just over the past six months but over a whole decade. And yet, there are just three FMCG schemes while there are 23 infrastructure sector schemes (which have delivered ‘average’ to ‘poor’ returns) and 11 gold ETF schemes!
The recent strong performance of fast-moving consumer goods (FMCG) stocks has shone the spotlight on this sector. While the Sensex has fallen by 11% between its peak of 21,005 in November 2010, today, the FMCG index has risen by a healthy 9%. Indeed, one of the most powerful and consistent rises in the past decade has happened in the stocks of FMCG companies.
Over the past decade (between 20 June 2001 and 30 June 2011) the BSE FMCG Index was up 16% (compounded yearly). And yet despite such a strong record of performance of FMCG sector stocks, it is a surprise that only three fund houses have FMCG schemes—Franklin FMCG, ICICI Prudential FMCG (both launched in March 1999) and SBI Magnum Sector Funds Umbrella-FMCG (launched in July 1999).
These schemes have given returns of 22%, 24% and 20% compounded respectively, which is significantly better than the both the FMCG index and the Sensex—and yet there have been no new FMCG schemes. However, in striking contrast, we already have 11 gold ETF (exchange-traded fund) schemes and 23 infrastructure schemes.
FMCG companies have delivered great returns because they enjoy strong demand from an increasingly prosperous Indian middle- and lower-middle class and are able to service that demand with low capital employed. That is why stocks like Nestle, ITC, Marico, Pidilite Industries and VST Industries have performed quite well over the past 10 years. In June 2001, ITC was at Rs25.16. Currently it is trading at Rs202.95, a rise of 23%, compounded yearly. Marico was trading at Rs5.15 and now finds itself at Rs155.75 (a compounded rise of 41%). VST is up 21% over the last decade and Pidilite Industries is up 36% per annum.
For long-term investors, these stocks promise a very attractive return with strong earnings predictability. And yet, for some reason, fund companies have been enamoured by cash-guzzling and value-destroying businesses in the infrastructure sector. They launched a flurry of infrastructure schemes in 2006 and 2007, which have destroyed investors' wealth. We wonder whether this same thing would happen to gold ETFs. Investors would be lucky if gold prices keep rising.
Long considered as 'defensive' stocks meant to be held only as a cushion during a market collapse, FMCG companies are charting phenomenal growth and their stock prices are keeping pace. But they are obvious picks and so fund companies possibly overlook them in favour of more fancied and hyped growth stocks like software, infrastructure or media. Internationally, FMCG stocks are called 'defensive' bets. When the broader market is down, these stocks hold their ground well, offering stability to the portfolio while other stocks take a beating. FMCG products, by their very nature, are essential for the daily requirements of all households-be it detergents, soap or toothpaste. Demand for such essentials remains steady even during economic downturns. That is why these companies witness steady growth even when other industries are slowing down.
But, for years now, the performance of FMCG stocks has been far from defensive. It is time that FMCG stocks are stripped off this oft-repeated and generalised 'defensive' tag. Like their products, the stocks are fast-moving as well. Many of the stocks have surged to new all-time highs, outperforming the broader market indices handsomely.
It is hard to believe that fund companies, who usually do not leave any opportunity to launch a new fund, have not been keen on cashing in on this sector so far. The same fund managers never miss an opportunity to talk about the Indian growth story and the consumption-led boom. Intriguingly, Mirae Asset Global Investments (India) launched Mirae Asset India-China Consumption Fund, an open-ended, equity-oriented scheme. The first-of-its-kind in India, the fund will focus on sectors and companies benefiting from the consumption-led demand that is driving the world's fastest-growing economies, India and China. The risk of investing through an unknown Korean fund manager into unpronounceable Chinese names is something we could have done without. Rather, Mirae could have simply concentrated on Indian consumption demand and launched an Indian FMCG fund.
Brokerages say that the pharma sector that has usually been one of the better performers, is under various pressures of cost and competition which are expected to affect margins
The pharmaceuticals business is among the sectors that are expected to do well in the first quarter of 2010-11, due to its characteristic resilience to inflationary pressure and higher interest rates that have caused an economic slowdown. In fact, the group of pharma companies has outperformed the benchmark Sensex significantly in the three-month period.
But the sector has some drawbacks, with companies like Dr Reddy's and Aurobindo Pharma joining Ranbaxy, Lupin and Sun Pharma on the warning list of the US Food and Drug Administration (USFDA). Other factors like product mix, operational performance and ramp-up of capacity will likely produce mixed results, according to analysts' expectations.
The brokerages consensus for the pharma sector is a 19% year-on-year top-line growth, a touch lower though from preceding quarters. However, according to Angel Broking, margins would decline by 110 basis points, which along with increased tax outgo would lead to flat growth in net profit.
While the benchmark Sensex lost 3% in the quarter from 1 April 2011 to 30 June 2011, the Moneylife Pharma Index, which comprises of 75 companies, rose by a good 8%.
Angel estimates that among the large drug producers Sun Pharma could post a sales growth of over 35% y-o-y mainly on its acquisition of Taro. It expects Cipla to post net sales growth of 15.5% y-o-y. Net sales for Dr Reddy's are projected to grow by 10%, Lupin by 17% and Cadila by 20.5%.
Amongst the small caps, Indoco Remedies is expected to post 21% y-o-y growth, whereas in the pack of multinationals, Aventis is likely to achieve 25% y-o-y growth in net profit, led by 10.3% y-o-y sales growth. The projected Rs53 crore profit estimate is on a low profit base in the previous year 2010-11.
Analysts at KR Choksey say the domestic formulations business will show robust growth of 15%-16% y-o-y driven by new product launches and significant advance into tier II & III cities as well as the rural market. They believe that overall margins would be under pressure due to expansion of the field force, regulatory filings (Para IV/ANDAs (Abbreviated New Drug Application)/DMF (Drug Master File)), pricing pressures in the US due to increase in competition and capacity addition.
According to Motilal Oswal, Sun Pharma, Ranbaxy and Divi's Lab would drive top-line growth in the first quarter of 2011-12 by about 16.3% y-o-y (excluding one-offs). Adjusted profit after tax (PAT) is expected to grow by 7.9% y-o-y. Sun Pharma, due to its Taro acquisition, Ranbaxy, on a low base, and Divi's Lab, from a recovery in business, will lead earnings growth.
But PAT growth of CRAMS (Contract Research and Manufacturing Service) companies like Strides Arcolab and Biocon (excluding Divi's Labs) will be affected.
According to ICICI Direct, pharma companies under its coverage are expected to post mixed results. Sun Pharma's numbers are not comparable due to consolidation of Taro's numbers and also due to discontinuance of anti-ulcerant Protonix and anti-cancer Eloxatin in the US market. Similarly, the results of Opto Circuits, Elder Pharma and Biocon are also not comparable as Opto acquired US-based Cardiac Science, Elder acquired Bulgaria based Biomeda and Biocon sold a stake in Axicorp.
Companies like Aurobindo, Cadila, Glenmark, Indoco, Lupin and Torrent Pharma are expected to report good y-o-y sales growth due to new launches and increase in field force. Cadila and Lupin are expected to lead the pack with about 20% sales growth. Unichem Laboratories is expected to report marginal growth in sales due to a change in the distribution pattern.
While healthy growth in domestic formulations sales coupled with good growth in the US market will drive the numbers, growth will be arrested by the absence of F2F products for Sun and Glenmark.
ICICI Direct also estimates a first quarter sales growth of 19% y-o-y to Rs9,819 crore, whereas PAT is expected to see marginal growth of about 1% y-o-y to Rs1,558 crore on a high base. It expects Glenmark, IPCA and Lupin to lead the pack.
Also, during the quarter, Sun Pharma signed a partnership with MSD (Merck Sharpe & Dohme) to market, promote and distribute MSD's diabetes products under different brand names in India. MSD would provide the scientific excellence and market success of the product to the partnership, while Sun Pharma would bring in its proven success and expertise in the marketing of drugs in the relevant therapeutic areas across India.