Fee cuts may erode Rs 3,000 crore of MF revenues, says Sanjay Sapre

Investors do need to moderate their expectations, but there are enough opportunities to generate alpha, says Sapre

The mutual fund (MF) industry has had a rough year in managing credit risks on the debt side, and volatility in equity markets. The cut in total expense ratio and other regulatory changes pose more challenges to the industry. Sanjay Sapre, president of Fraklin Templeton Investments, shares his outlook for the industry, in an interview to Jash Kriplani. Edited excerpts:

How do you see regulatory changes impacting distribution models? 

Multiple distribution models will co-exist. We will see the growth of fee-based models catering to the needs of high networth individuals (HNIs), and models catering to individual investors who have monthly investment commitments of as low as Rs 500.

The recent cuts in total expense ratio could take out Rs 2,500-3,000 crore of industry revenues. Therefore, the overall revenue pie will shrink for all stakeholders. However, the level of under-penetration offers huge growth opportunity, while technology will help reduce costs for industry participants.

How do you see growth playing out for the industry?

We expect the industry to grow at 12-15 per cent annually. This means the assets will double every five years. Participation from millennials and the management of assets for retirement needs are two big drivers for the industry.

Creating solutions for senior citizens so that they can manage their retirement through a steady stream of income is going to be an important area. The industry can do a lot more in this space. Notwithstanding some short-term growth disruption, systematic investment plans (SIPs) could continue to remain a key growth driver for the industry.

How can the industry address challenges emerging on the debt side? 

At both the industry and regulatory levels, there are discussions on increasing the disclosure levels for debt instruments, similar to those in the listed equity space. We should see such changes in the days ahead.

Can passive funds gain a larger market share in India? 

In the last two years, we have had our own version of quantitative easing on account of demonetisation. This released a big gush of liquidity, leading to the re-rating of several stocks. Liquidity tends to artificially depress the real value of stock-picking.

However, demonetisation was a one-off and stock-picking will regain its place. Yes, investors do need to moderate their expectations, but there are enough opportunities to generate alpha. Passives will find their place in India, but not like what we have seen globally, where there has been a rush of assets from actives to passives.

What has been your reading of the Budget?

A relative level of fiscal discipline was maintained, even though it is an election year that brings its own considerations. Some of the proposals should spur consumption as it has put more money in the hands of the middle class and farmers.

However, there has not been a significant thrust on infrastructure. If you look at the quality of spending, it is largely revenue-oriented and not focused towards capital formation. This will delay the long-term and sustainable boost that you get from infrastructure spending or capital outlays. It remains to be seen how much the fiscal discipline could be maintained, given revenue projections from the government seem a bit optimistic based on the numbers we have seen.

Can you share some plans of Franklin Templeton in India?

We launched an alternative investment fund (AIF) in 2018. We want to offer the alpha-generation capability of alternatives to Indian investors. We have also set up a small solutions team.

Globally, we are seeing that investors are more focused on outcome than on relative returns. They are looking for Libor plus two-three per cent returns. In India, we would like to bring these customised solutions to wealth managers, institutional investors and family offices.