The fees charged by active asset managers are exorbitant and need to come down,says Joseph Cherian, Director at CAMRI, National University of Singapore. Cherian, who was in Mumbai last week to attend a conference on Future of Financial Markets organised by Financial Technologies, believes if there is adequate transparency and fee structures are right, India will be a major player in the retail mutual funds space. Edited excerpts from an interview with Chandan Kishore Kant & Mehul Shah:
Why do you think the fee structure of asset managers is exorbitant across the world?
The fee structures for active management, where you have a manager doing a long-only strategy of picking stocks and charging a fee for it, is way too high. We have management fee structures in excess of one per cent, which has to come down. Most hedge funds charge two per cent management fees and 20 per cent performance fees. Again, that’s too high. Fees need to be much lower than what they are right now. It’s true for Asia, it’s true for the US and I am sure it’s true for India, too. There should not be any hidden fees, because average investors are not able to understand.
After the Indian capital markets regulator abolished entry load on equity funds, the country's fund industry is struggling to increase its penetration level as distributors are unwilling to push products. In your view, how should industry reach out to investors?
There are two ways one can do this before bringing in a third-party distributor. Deploy technology and internalise the whole distribution system. India is at the forefront of technology and advancements made are amazing. Fund houses should find ways to bring up these technologies on online platforms.
Some mutual fund companies in the US have their own distributors. If you are charging a fee, say one per cent, it should include all your distribution fees.
These distributors have access to portfolio managers and know the companies' products well and they can explain. So, these people are not your sales people but product specialists. It's a bit expensive. But, third-party distributors are more expensive and people sell products of those who pay more fees.
In comparison to what ETFs (exchange traded funds) charge globally, Indian investors are charged more. Is that justified?
It depends on what kind of ETFs are sold. If you are investing in ETFs through the systematic investment plan (SIP), one does not need to charge more than five basis points. If you go into more illiquid space you need to charge more because it takes more work. Because often you cannot replicate the full index. Then, the institution is taking more risk. But, ETFs are the cheapest way to enter the market. For instance, in India, Nifty is a very liquid index. So, Nifty ETFs are good options. Fund managers should not charge more for such a plain vanilla product.
There are around 45 players in the Indian fund industry. Is there a need for so many players?
In Singapore, retail distribution is less successful and it never took off big time, while in Hong Kong it is doing big business. So, it depends on the investing public. The other thing is there needs to be lot of patience. There is no doubt in my mind, assuming there is adequate transparency and fee structures are right, that India will be a major player in the retail mutual funds space.
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There is huge potential in India as savings are going up. So, the surplus amount needs to be put in high-risk assets.Fewer players but good players is more important than just numbers. I think, several emerging economies fall in the trap of becoming a financial centre and start inviting more people by liberalising, and that way no one gets their share of the pie. I think India-born firms with the expertise and knowledge can actually build up the pie because they understand the geography and culture, and they know how to penetrate.
Why do you think products like inflation-index bonds are necessary in India?
Inflation is a problem, not just when it’s high. It’s also a problem when it’s low. Let’s say, my subsistence level of living is about $50,000 a year today. I want to make sure I have that $50,000 a year, in real terms, 30 years from now. What’s the best way to do that? Put $50,000 in discounted terms in an inflation-index bond, then 30 years from now, that inflation-index bond gives me exactly $50,000. It’s called asset-liability management at the personal level. The average person who doesn’t have surplus funds, needs some kind of a guarantee that he will be able to pay for his future needs. To do that, one needs inflation-index bonds to be issued.